For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.

It’s October 1985, and Marty McFly, hero of “Back to the Future Part II,” catches a ride in a decade-hopping DeLorean time machine and goes three decades into the future. Leaving his hometown, Hill Valley of 1985, with Doc and girlfriend Jennifer, he arrives at a considerably different Hill Valley of 2015.

If the movie were reality, the teenage Marty might be a bit disappointed in the here and now—no power-lacing sneakers, no flying hover boards, no “Jaws 19,” and no self-drying clothes.

As a young investor, however, Marty should be quite pleased. Why? Today, he would have access to:

More choices. While in 1985 Marty had the bread and butter asset classes from which to build a portfolio, today he has much greater choice of active and index funds—from style and sector funds to country and regional funds. Or, he could choose just a few total market index funds that span the domestic and international stock and bond markets. He could make those investments via the traditional mutual fund that his father George McFly likely used, or he might use the newer exchange-traded fund.

Marty might also be interested in the target-date fund, the mutual-fund version of a time machine. He might set a course to retire in 2055 and watch his target-date fund automatically shift to a more conservative allocation as he gets closer to his target retirement date.

Better markets. While trading was not conducted under a Buttonwood tree* in 1985, stock markets have since become more transparent, competitive, and liquid, leading to trading that is more efficient and less costly. Marty would find that improved market structure has greatly reduced frictional trading costs and improved investors’ returns over the past 30 years.

Better funds. Markets have improved and so has investment management. For example, index fund managers have honed their ability through technology and trading techniques to more precisely track target benchmarks. In addition, Marty might marvel that benchmark construction methodologies are now more objective, rules-based, and transparent, resulting in indexes that better reflect the underlying market and reduce turnover.

Lower costs. Marty might suffer from sticker shock when he sees some of today’s prices—$1.25 for a bottle of soda; $8.50 for a movie ticket; and $31,200 for a year of college.** But he’d be downright tickled that the expense ratio for the average Vanguard fund has fallen to 0.18% in 2015, down from 0.61% in 1985****. He could gain exposure to, say, large-cap U.S. stocks for 0.05% via the Admiral™ and ETF shares of Vanguard 500 Index Fund. The expense ratio for the fund was five times higher in 1985 at 0.28%.

More information, better account access. Marty would no doubt be thankful that Al Gore invented the internet. With a few clicks of the mouse or touches on the mobile screen, he could find a veritable almanac of information on funds and investing, and transact in his accounts. Marty would also have access to a variety of online tools to help him construct a well-balanced, diversified portfolio or determine the optimal saving rate to ensure a secure retirement. And he could have a robo-advisor manage his money for him.

More tax-advantaged opportunities. IRAs were a little over ten years old when Marty left 1985, and the 401(k) plan was still in its infancy. Today, Marty would have even more tax-advantaged options, such as Roth IRAs (introduced in 1997) and Roth 401(k)s (introduced in 2006) that enable after-tax contributions, tax-deferred growth, and tax-free withdrawals.

Should Marty have the opportunity to invest through his company’s defined contribution plan, he would likely be auto-enrolled, defaulted into a diversified target-date fund, and see his yearly contribution increase automatically. These improvements in plan design (under the 2006 Pension Protection Act) would undoubtedly lead to a more secure retirement for our time traveler.

In addition, if Marty wanted to save for college for himself or other members of his family, he could open a 529 account, which is now the standard tax-advantaged option for education savings.

Yes, in “Back to the Mutual Fund Future,” Marty would be one happy camper. If he’s a fan of the Chicago Cubs, it might even double his pleasure to see Wrigley Field be home to the world champions.***

*Marty would have the set the DeLorean’s time dial to May 17, 1792, which was the date on which 24 stock brokers met under a Buttonwood tree at 68 Wall Street to formalize trading. The Buttonwood Agreement started the New York Stock Exchange.

**College Board data for a four-year private institution.

***In the movie, the Cubs swept Miami to win the 2015 World Series.

**** As of December 1985. Source: Lipper, a Thomson Reuters company.

Note:

Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the Fund name refers to the approximate year (the target date) when an investor in the Fund would retire and leave the work force. The Fund will gradually shift its emphasis from more aggressive investments to more conservative ones based on its target date. An investment in the Target Retirement Fund is not guaranteed at any time, including on or after the target date.

John Woerth

John leads Vanguard Public Relations Group and serves as a company spokesperson. Since joining Vanguard in 1986, he has served as editor of Vanguard’s quarterly shareholder newsletter, "In The Vanguard," and monthly employee newsletter, "Crew's News." John earned a B.A. and a master's degree in journalism from Temple University.

Comments

Donald G. | November 14, 2015 9:16 pm

Mr. Woerth: Another great article. I find it surprising that we do not realize what has happened in our lives until we look back and see how certain steps that we take alter our finances.I began building my retirement benefits at age 18 when I went into the military in 1966. I knew that I was building up financial benefits because I worked for the federal government which had a defined benefit plan and later on in1979 in a civilian capacity with the Post Office.I started managing my 401k when the Thrift Savings Plan started. I hope Marty knew about dollar cost averaging because that’s how I built my program.I did not know Vanguard even existed until I bought one of Mr. Bogle’s books.He has created the ninth wonder of the world and it is called the index fund.It was around during marty’s time I believe although I do not know if he was aware of it’s financial power.I transferred almost 45 years of savings in my 401k to Vanguard in 2010and now I am a committed Vanguard Saver. Good Luck to All in your retirements!

John D. | October 21, 2015 1:09 pm

Coincidentally, 1985 is the year we began saving for retirement in earnest with, among other funds, a $10K investment in Peter Lynch’s Magellan Fund. In 1993, my wife received funds from her aunt’s estate. She’s risk-averse, so I put it in Vanguard Wellesley-Income Fund, which went on to post the best return if all funds over the subsequent 20 years. Today, at age 76, our nest egg is split equally between Vanguard and Fidelity funds with above average returns and below average risk. We rode out the Great Recession with minor changes to our portfolio, and still are 50% invested in equities.

M L P. | October 22, 2015 6:35 pm

Carlton S. | October 21, 2015 11:39 am

If I were Marty in 1985, I would just invest in Microsoft stock.

Of course, if it had been widely known in 1985 that Microsoft would increase in value by a couple of orders of magnitude, the stock would have immediately increased in price to reflect that information. The people who would mainly have benefited (especially, Bill Gates) would have become rich sooner rather than later, and most investors would have just earned a “normal” market return. That’s how efficient markets work, and I think that is fair.

A market return is what most investors will get in the future, given the impossibility of foreseeing which firm will become the “next Microsoft.” But by historical standards, a “market return” can generate a lot of increase in value when compounded over several decades, and investing in low cost index funds essentially (though not legally) guarantees close to a market return.

What's your opinion?

Vanguard welcomes your feedback on this blog, but please read our commenting guidelines
first. Comments will be published at our discretion. Questions or comments about your Vanguard investments or customer-service issues? Please
contact Vanguard directly. Opinions expressed in blog comments are those of the persons submitting
the comments, and don't necessarily represent the views of Vanguard or its management.

You might like

Twitter

For more information about Vanguard funds, visit vanguard.com or call 877-662-7447 to obtain a prospectus or, if available, a summary prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.

Vanguard ETF Shares are not redeemable with the issuing Fund other than in very large aggregations worth millions of dollars. Instead, investors must buy and sell Vanguard ETF Shares in the secondary market and hold those shares in a brokerage account. In doing so, the investor may incur brokerage commissions and may pay more than net asset value when buying and receive less than net asset value when selling.

Investments in bond funds are subject to interest rate, credit, and inflation risk.

Diversification does not ensure a profit or protect against a loss.

Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. Stocks of companies based in emerging markets are subject to national and regional political and economic risks and to the risk of currency fluctuations. These risks are especially high in emerging markets.

All investing is subject to risk, including the possible loss of the money you invest.